Ahead of the Curve

The lending environment is undergoing a worrying change. Funds that European direct lenders have raised but not yet deployed are at an all-time high and banks in most Western-European jurisdictions have renewed lending following years of reticence after the global financial crisis, leading to increased competition amongst lenders in the small and medium enterprise (SME) market.

Success assured

When Russell Büsst was coaxed from Amundi in 2011 to head Conning’s expansion into Europe, he had three objectives: break even and hit $10bn (€7.38bn) under management within three years; use the firm’s insurance-industry relationships as a platform to build the pan-European business; and balance property-and-casualty (P&C) with life-and-pensions (L&P) assets.

Number one is in hand – European assets are at $10.7bn. Number two is a work in progress. But number three is the big challenge: in North America, assets are split 50/50 between P&C and L&P; in Europe it is 80/20.

“We’d like to see that change,” says Büsst.

He sees the increasingly regulated European L&P and pension fund sectors as fertile ground for Conning’s expertise in insurance asset and liability management, which it has been developing since 1988.

Swiss Re owned the firm until selling it in 2009 to Aquiline Capital Partners, a private equity firm specialising in insurance and other financial services. Conning strengthened its US presence earlier this year with the acquisition of a team managing fixed income for insurers from Brookfield Investment Management.

“The investment world, for the insurance industry, used to be two-dimensional – it was about risk and reward,” says Büsst. “Now it is three-dimensional – risk, reward and capital. We have spent years developing our risk and capital management solutions (RCMS) business to deal with that – and the RCMS team has integrated that third dimension into the investment process, specifically in the US.”

President and CEO Woody Bradford pushes the point home. “We have been successful with insurance clients because, as specialists, we do a number of things very well,” he says. “Among those, we are bottom-up investors, we think about the need for assets to support liabilities, and everything is customised. We have clients at one end of the spectrum of investors working to comply with regulations, and at the other some use our tools and techniques more pro-actively, as inputs into their investment decision-making and risk management processes.”

Almost all of its US clients use the firm’s RCMS services – which spans economic scenario testing, portfolio analysis and capital and enterprise risk management software – and then go on to build portfolios with Conning based on those inputs. But that model is proving difficult to replicate in Europe.

RCMS goes down well in continental Europe – the acquisition of the assets of risk management software provider DFA Capital Management in 2010, with an office in Cologne, helped in German-speaking territories. But Conning’s European Life and pension fund clients – so far exclusively continental – have tended initially to come to the firm for asset management. With their longer-dated liabilities and diversified portfolios, these are the institutions Bradford and Büsst are convinced they can work with along the whole-business lines of their US model. They point out that the model has exported well to Asia, through a Hong Kong-based joint venture, Cathay Conning Asset Management.

“We knew we would spend our first few years in Europe introducing ourselves,” says Büsst. “There probably isn’t a single insurer that hasn’t heard of us. But in the pensions world? No. That’s why RCMS is important for us: talk to the risk management professionals on the continent and it’s different. Now, where we have the opportunity to join up the asset management and enterprise risk management work. we think that can be valuable, particularly going into a Solvency II world.”

The headcount for Conning in London has gone from three to 19 since Büsst joined and growing assets will support that further. He is alive to the possibility that, in the pension-fund world, it is up against incumbent actuarial consultants and solvency managers; and that even among L&Ps, it might be making its play three years too late. Since Solvency II appeared on the horizon, actuaries and portfolio managers have worked hard to join up their thinking and many were early to buy the required software from the two leading providers, Igloo and Moody’s Analytics’ Barrie & Hibbert.

Büsst insists the fight is not over. For a start, while Solvency II was announced early, progress has lagged behind regulatory advances in North America and Asia. Fewer investors feel confident trusting a single systems provider, which is leading to some additional business relationships. Many software contracts are coming up for renewal. But most importantly, the conviction that real value is added to risk management by the sort of asset management experience that no software provider and few consulting actuaries have, is at the heart of Conning’s philosophy.

“Lots of people ‘do Solvency II stuff’, but what that often means is that large asset allocations to asset classes such as equities may be restricted because of an onerous capital charge,” says Büsst. “Few people seem to really drill down into like-for-like marginal investment decision-making under these rules. For some asset classes things are pretty clear but if you are looking at structured products, for example, it’s much more difficult. When these start to become key questions we want to be in a position to provide an answer. This is where the industry really needs to up its game.”

Unsurprisingly, perhaps, Conning’s European success has come in niche asset classes like structured credit and US mortgage loans. Trade finance has generated interest as a short-dated asset for P&C insurers.

“Right now, CIOs are asking us how they can put it into their existing strategy so they don’t have to go to their boards with a new asset class,” says Büsst. “That’s where opportunities are developing for our team on the ground here in Europe. The new asset classes start the conversation, which eventually comes back around to the core portfolio.”

In those core portfolios, activity is confined to corporate bonds. The other options it offers are broad US fixed-income assets and US and Asian equities – Büsst recognises that a big part of the European project has to be product development, as well as selling the existing range. European active equities, high-yield bonds and property are on the agenda, potentially through further acquisitions. The firm is looking at launching UCITS funds to both generate track records in its leading strategies, and give its clients access to global investment strategies.

So there is much to do. But four years ago, only 8% of Conning’s assets came from outside America – today that is more than 20%. There were fewer than 15 employees in Europe and none in Asia – today it is close to 60. The firm is more confident in its unique place in the market. “A decade ago, as an insurance-specialist asset manager with another firm, my team went through a bit of an identity crisis,” Büsst recalls. “Did the world really need insurance asset managers? But I’ve been doing this for 30 years and today, without a doubt, it has never been more important.”